Some people have come back to me after seeing my portfolio and questioned me as to why I do not invest in Balanced funds? Well, the short answer to that is, investment in Balanced funds as part of a long term MF portfolio is unnecessary, not only for me but for any serious investor. If you are looking for a longer answer then you must read this post carefully.
Before I even get to that, let me acknowledge that several Balanced funds have given great returns over a period of time. You will actually expect them to do no less as they are having 65 – 70 % in equity and our markets by and large have done well for the last few years. Even when they did badly the volatility in the Balanced funds were less. Again, you would expect this as the debt part will dampen the volatility. These two aspects, namely decent returns and low volatility are normally cited as reasons as to why one should invest in Balanced funds. Why do I not feel the same way then?
The most important reason is that I do not believe in mixing asset classes or investment objectives. Every financial planner worth his salt will tell you that you must avoid mixing insurance and investment today – they did not do so a few years back when they were peddling ULIP seriously. Similarly, they should also be telling you that it does not make sense to mix two asset classes debt and equity in a single product. Instead they may tell you of inbuilt asset allocation that a Balanced fund will give you and some will even go as far as to say that you only need a single Balanced fund to meet all your needs.
Long term investing is about having 3 portfolios with very specific objectives – a debt portfolio to form a stable base and ensure that you do not sell equities at the wrong time, a MF portfolio to meet most of your financial goals and a stock portfolio to give a kicker to your returns that you will need at retirement. There is absolutely no need to have Balanced funds here. If the markets are doing well you do not need them – you want 100 % of your invested money to get the benefit of growth not only 65 % of it. If the markets are doing badly you want to buy more diversified equity MF to get benefit of lower purchase price. So you have a product that you do not really need in good times or in bad times of the markets. I hope you get the point.
So who does need a Balanced fund? Well, I really had to stretch for this but I could come up with these set of answers :-
- New investors into MF so that they can understand how the instrument works.
- Passive investors who do not want to invest in debt separately or manage their own asset allocation.
- People with no time to review or monitor their portfolios on their own.
Now, the fact that you are reading this post probably indicates that you are not in any of these categories, so you should really not be investing in a Balanced fund. Doing it already – well, there is no rule which says you cannot stop. On a more serious note, you need to give your equity investments the maximum chance to grow and Balanced funds are simply not the right product to achieve this objective. It does not matter how many people tell you to do so, what is wrong cannot be made right even if the majority opinion says so.
Sector funds are the other set of funds you should stay away from, but that is a topic for the next post.
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